Tim Is Offered Two Gambles

question 43

Multiple Choice

Tim is offered two gambles. With gamble A, he either gains $2 or loses $1 with a 50 percent probability. With gamble B, he either gains $3 or loses $2 with a 50 percent probability. Tim prefers gamble B to gamble A. What can we conclude?

• A) Tim is risk loving.
• B) Tim is risk neutral.
• C) Tim is risk averse.
• D) Insufficient information to determine.

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Definitions:

BAT Model

BAT Model stands for the Behavioral Analysis and Therapy Model, which is typically related to psychology and behavioral sciences, not a common term in finance and hence might be mistaken or the context misidentified.

Cash Outflows

Money that exits a company, typically as a result of operational expenses, investment activities, and financing.

Opportunity Cost

Opportunity cost is the potential benefits an individual, investor, or business misses out on when choosing one alternative over another.

Target Cash Balance

A firm’s desired cash level as determined by the trade-off between carrying costs and shortage costs.